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Taxes and tip boxes

| May 31, 2018 | audits

Taxpayers in Maryland who receive tips as compensation for their services should be aware of the Internal Revenue Service Chief Counsel Memorandum regarding cash payments issued from tip boxes. According to the IRS, the company in question had people on its premises to perform services. However, the individuals who performed the services were classified as volunteers by the company and were not paid by the company with benefits or compensation. Instead, the individuals were given cash payments from tip boxes that held payments given by customers.

The customers were not required by the company to make any payments to the individuals working on the premises. The customers were also able to exercise discretion regarding how much cash they wanted to contribute, if they wanted to contribute at all.

After the end of each work shift, the individuals working on the premises determined in which manner the cash from the tip boxes would be allocated. There is no proof that the company was aware of how money the customers placed into the tip boxes. It has also believed that the company failed to issue W-2 forms and did not complete Forms 941 for those amounts. While conducting an audit, the IRS found that the company was obligated to treat the volunteers as employees in order to collect FICA taxes. A letter was issued to the company advising it of the determination and demanding payment.

Businesses or individuals whose tax returns have been selected for audits by the IRS may speak with a tax attorney about their rights. The attorney may review the facts of the case and may explain to the client how the tax codes apply to the particular situation.